Stretch Your Savings By Working Into Your 70s

For every 401(k) participant, there comes a day of reckoning - the day he or she must begin making required minimum distributions and start paying taxes on the nest egg accumulated with the help of tax-deferred saving. In this article, we'll show you how working a little longer can help stave off high tax payments for retirement.

Normally, investors who have used a tax-deferred retirement savings vehicle such as a Traditional IRA, 401(k), 403(b) or 457 plan must begin taking these minimum distributions soon after reaching age 70.5. Each of these distributions is taxed as ordinary income, nibbling away at the retirement nest egg.

For those looking to continue the benefits of tax-deferred saving, there is a simple way to delay required minimum distributions from a retirement plan. Just keep working.

IRS regulations allow participants in a 401(k) and other workplace retirement plans to delay their minimum distributions well beyond 70.5 as long as they continue to work. (This option does not apply to traditional IRAs; for Roth IRAs there are no required minimum distributions.)

The Benefits of Working LongerOf course, to many workers, the prospect of working into their 70s is not appealing. But for seniors who are in good health and enjoy their jobs, the benefits may be worth it.

Two distinct groups can benefit from such a plan. There are those who need to boost meager retirement savings, and then there are those who did a fine job saving for retirement and wish to preserve some assets for their heirs. (For further reading on your kids and retirement, see The Generation Gapand Boomerangs: Why Some Kids Never Leave The Nest.)

Under either scenario, working past age 70.5 will allow the employee to postpone required minimum distributions if they participate in an employee retirement savings plan. The types of plans that qualify for this treatment include 401(k), 403(b) and 457 plans, and tax-sheltered annuities. Even a part-time job that offers such a plan will postpone the day of tax reckoning for the given plan.

The Basics of Required Minimum DistributionsUnder IRS regulations, the owners of Traditional IRAs and participants in employee retirement plans must begin making minimum withdrawals by April 1 of the year after they turn 70.5. For instance, somebody who turns 70.5 on May 30, 2009, would have until April 1, 2010, to receive the first required minimum distribution.

Then there would be additional minimum distributions required for each succeeding calendar year. In the first year, the taxpayer would be required to receive two minimum distributions if he or she waited until the first three months of the calendar year (January 1 to April 1) after turning 70.5.

In the scenario above, the first distribution would cover 2009; the second distribution would cover 2010.

The size of the required minimum distribution is governed by tables published by the IRS. Most taxpayers would use what is called the Uniform Lifetime Table, which provides a figure representing an anticipated distribution period. The account balance is divided by the distribution period figure to come up with the minimum amount that must be withdrawn by December 31 of the given year.